Budget 2016 – Where do PSU banks go from here?

The big theme for the Union Budget 2016 was supposed to be the PSU Banks and how they will shape up post the budget. There are four important announcements in this budget that will impact these PSU banks. In fact, it would not be wrong to say that this budget could actually lay the foundations of re-rating the PSU banking space in India. Here is why…

A case-by-case approach to bank recapitalization…

One of the themes of this budget has been that the approach to bank recapitalization will be more on a case-by-case basis. The allocation of Rs.25,000 crore was surely disappointing but dig a little deeper and there is a method to the madness. The government has clarified that there was no hard-and-fast limit of Rs.25,000 crore and deserving banks will be able to get more recapitalization if required. This will have the effect of separating the wheat from the chaff. It will also give the government of India a basis for focusing on banks that have a promising future and who are willing to display a positive performance metrics to justify higher capital allocation. One cannot forget that the government has deliberately kept its disinvestment program conservative at half the targeted levels of last fiscal. This will ensure that PSU banks do not get crowded out of the IPO market.

Tweaking the definition of Tier-I capital…

The big question before the budget 2016 was how banks can get the required capital to meet the Basel III commitments by 2019. Well, the RBI has a way out and that is officially announced in this budget. Banks will be permitted to capitalize their revaluation reserves and reserves created out of foreign currency translation and classify them as Tier-I capital. This will add nearly Rs.350,000 crore to the capital base of PSU banks and largely address the problem of higher capital requirement and of NPAs. This tweaking is in tune with global practices and in this context will go a long way in meeting the capital needs of Indian PSU banks.

A boost for the bond portfolios of banks…

Two unrelated announcements have benefited Indian PSU banks substantially. Firstly, the borrowing target of the government for the full fiscal year is likely to be substantially lower than last year. This means that there will be less pressure on interest rates and they will be headed downwards. Secondly, the fiscal discipline maintained by the government has ensured that the RBI will now move closer to a rate cut. The impact is already visible in 10-year G-Sec yields which cracked by 22 bps on budget day. This is great news for the bond portfolios of banks.

And finally, a privatization template called IDBI… 

The big take-away from the Union budget 2016 could be that the government may offer a basic template for privatization via the IDBI model. The government proposes to use IDBI as a case-study wherein the government will look to monetize the assets of the bank and also explore alternatives like strategic sale to foreign investors. Once the template is ready, it opens up a huge opportunity for other PSU banks.

Remember, IDBI will not just be a template in terms of divestment. It will also be a template in terms of greater autonomy to banks, bringing their management practices at par with private banks and giving them greater operational freedom. It is now accepted that banking reforms will remain incomplete unless the issue of greater autonomy is addressed. The idea of using IDBI as a template is not just about divestment but also exploring whether majority foreign ownership can be brought into PSU banks and whether they can totally unshackled from controls.

For banks there have been interesting developments in this budget. If things are taken to their logical conclusion, it could result in a true re-rating of the PSU banking space. That has surely been awaited for a very long time.

Read more news and highlights regarding Union Budget 2016 here.

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